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Thursday, August 14, 2014

Okay, so I came across thing called a "fair tax", being pushed by the somewhat uncreatively named fairtax.org. This is a website maintained by a group called Americans for Fair Taxation. Among other things, they have a link to a current proposed bill, HR 25, which outlines the fair tax program. In this bill, the proposed tax rate is 23%.

However, this is an "inclusive" rate, which is a bit of accounting chicanery. Let me explain ...

Say you have an item that costs $100, and the sales tax is 23%, and we go with the assumption that this means the total is going to be $123. However, under the fair tax legislation, that $23 has already been paid ... the $100 is "tax included". This means that the item actually cost $77, and the $23 was added to pay the tax, bringing the total cost to $100.

This also means that the actual tax rate is 29.87 percent, not 23 percent as advertised. So, bullshit number one.

I'll admit, this "fair tax" sounds good in theory: people would pay taxes on their spending, not their income. However, there are two more huge problems with this.

First, it is very regressive, and would hit the poor the hardest. Let's consider someone making $7.25 an hour, the current minimum wage. They do not get to take home that entire amount, because the federal income tax is but a small part of what is withheld. State and local taxes, Medicare, and Social Security taxes are still being withheld.

This means that, in Pennsylvania (where I live), a minimum wage employee working full time grosses $290 a week. From that is deducted $17.98 for Social Security, $8.90 for Pennsylvania income tax, $4.21 for Medicare, $2.90 for local income tax, $0.06 for local services tax, and $0.20 for Pennsylvania unemployment tax. This brings the grand total of deductions to $36.25, leaving $253.75 a week in take-home pay.

And, yes. Pennsylvania's taxation system is dumber than a box of hammers.

Assuming this money all gets spent just on the necessities, this means $46.25 of each paycheck will go toward this "fair tax", leaving $207.50 a week (or $10,790.00 per year) for food, housing, and transportation.

Interestingly, under the current income tax, the amount withheld for federal income tax is $17.08 (just under 5.9 percent)... which, if I'm not mistaken, is a lot less than $46.25. This also leaves a net of $241.57 per week, or $12,561.64 per year.

This is a difference of $1,771.64 per year. This also does not take into account the fact that this minimum wage worker will get most, if not all, of the $888.16 withheld for federal income tax BACK.

So, bullshit number two.

Second, it would suppress economic activity. If people are only taxed on their spending, then the people with the most resources would elect not to spend ... as a way to legally avoid taxation. Any spending they did would be overseas or through international intermediaries, and such activity would be exempted from taxation by virtue of it being outside of US jurisdiction.

Investment -- in new businesses, in expanding existing businesses, in the stock market -- would plummet to near zero, since taxation on investment is now front-loaded ... and I know of very few investments (aka none) that offer an over 20 percent annual return.

And this completes the bullshit trifecta.

This thing pops up every now and again, whenever some conservative talking head gets a wild hair and thinks he or she has found the "cure" for the creeping socialism of that illegitimate Kenyan Muslim interloper Obama, and it bounces around the internet for a while until people finally realize that hey, this is a really stupid idea and let's drop it. Then it lies dormant for a while, like the flu, before mutating and bursting forth in another vomitous display of dumbassery.

Not surprisingly, the people who stand to gain the most from this? People making over $200,000 a year.

It is also interesting to point out that William Gale of the Brookings Institution did his own analysis of this proposal, but he took into account the fact that about 15 percent of people were going to cheat (to be fair, I have a hard time seeing how they could do it ... but, then again, I don't understand the appeal of "American Idol" either). What he found was that, in order to remain revenue-neutral (that is, to replace the current system of taxation dolllar for dollar), the exclusive tax rate would have to be around 39.3 percent.

Is the current tax system inefficient? Very probably. Is it complicated? Yes, insanely so.

However, it seems to be a common assumption among conservative thinkers that "complicated = bad", and simplification is always the answer. While I am a firm believer that simple is often better, I will not go so far as to say "always". There are times when the complexity is needed ... say, when you are trying to devise a tax code that expects a contribution from everyone, based on a realistic expectation of that person's ability to pay ... instead of coming up with some cockamamie idea like "well, shit. Just charge everyone sales tax on everything and be done with it."

It is important to note that the only spending that is exempted is for education. Everything else -- food, gasoline (which already carries a 22 percent exclusive tax that would not be repealed), interest on loans, credit cards, mortgages, housing -- would be subject to this tax. This means that, not only are you paying $69,000 in sales tax on a house that costs $300,000, you're also paying sales tax on the interest you're paying on the loan you took out, in part, to cover the original sales tax.

Sounds like double taxation to me.

My opinion? This entire thing should be chucked into the Potomac River and be allowed to settle to the bottom, so it can become encased in muck and eventually fossilized, so that some archeologist in the distant future can find it, look it over, and say to his or her colleagues, "Can you believe these assholes were running things?" I gotta lie down.